Lattice Semiconductor Corp. 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for Lattice Semiconductor Corporation for the three-month period ended April 2, 2011. Lattice designs, develops, and markets high-performance programmable logic devices (PLDs) and field-programmable gate arrays (FPGAs). The company operates in a single industry segment and relies heavily on sell-through distributors for revenue recognition.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $82.6 million | $70.4 million |
| Gross Margin | 60.0% | 58.5% |
| Net Income | $10.9 million | $11.1 million |
| Diluted EPS | $0.09 | $0.10 |
| Operating Cash Flow | $1.0 million | $20.9 million |
| Cash & Equivalents | $182.5 million | $156.1 million (end of period) |
| Total Debt | None reported | None reported |
Liquidity: As of April 2, 2011, the company held $235.7 million in cash, cash equivalents, and short-term marketable securities. Working capital increased to $281.7 million.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 17% year-over-year, driven by strong growth in the Industrial (up 67%) and Consumer (up 28%) end markets. The Communications market remained flat.
- Product Mix: FPGA revenue grew significantly with a 38% increase in units sold. New product revenue increased 31%.
- Expenses: Research and Development (R&D) expenses rose 37% to $20.1 million due to higher engineering mask and wafer costs. Selling, General, and Administrative (SG&A) expenses increased 11% to $17.2 million.
- Restructuring: The company recorded $1.8 million in restructuring charges in Q1 2011 compared to $0.1 million in Q1 2010. This includes a new 2011 restructuring plan to refocus R&D and sales resources.
- Cash Flow: Operating cash flow decreased significantly to $1.0 million from $20.9 million, primarily due to changes in working capital components (foundry advances and distributor allowances) that were favorable in the prior year but not in the current quarter.
Guidance, Outlook, and Risks
- Outlook: Management expects future near-term revenue growth in the Communications end market to outpace other markets. The company anticipates continued significant investment in R&D to maintain product leadership.
- Restructuring Plan: The 2011 restructuring plan projects total charges of $3.0 million to $6.0 million through fiscal 2012. Approximately $2.7 million was recorded in Q1 2011.
- Stock Repurchase: The company has a $20.0 million stock repurchase program. Approximately 700,000 shares were repurchased for $4.3 million in Q1 2011.
- Key Risks:
- Concentration: 44% of revenue comes from the Communications end market, and 53% comes from the Asia Pacific region.
- Supply Chain: The company relies on Fujitsu as the sole source supplier for wafers for its newest products.
- Liquidity of Investments: The company holds $7.4 million in auction rate securities classified as long-term due to illiquidity and failed auctions. Realization of value may differ from fair value.
- Legal: Several patent infringement lawsuits are pending (e.g., against Intellectual Ventures, Intellitech), though one (Stragent) was resolved in April 2011.
Investor Verification Checklist
- Verify the sustainability of revenue growth in the Industrial and Consumer markets versus the flat Communications sector.
- Monitor the execution and cost impact of the 2011 restructuring plan, specifically the projected $3.0M-$6.0M total charge.
- Assess the liquidity risk associated with the $7.4 million holding of auction rate securities and the potential for impairment charges.
- Review the dependency on Fujitsu for wafer supply and the status of the new ERP system implementation.
- Track the resolution of pending patent litigation and potential financial exposure.